Westpac: RBA to cut rates in April or May

On Tuesday the Reserve Bank board decided to leave the cash rate unchanged at 2.25 per cent.

“When we forecast two rate cuts in February and March back on 4 December last year we expected that for such a significant about turn in policy the bank would have been comfortable with consecutive moves,” Mr Evans said following the RBA rate announcement.

“Since the February move we saw no compelling reason to change that view.

“That view has turned out to be a misjudgement,” he said.

However, Mr Evans noted that RBA governor Glen Stevens appears to have adopted a strong easing bias, effectively indicating that another cut can be expected over the next month or two.

In the final paragraph of his statement on monetary policy on Tuesday, Mr Stevens said: “At today’s meeting the board judged that, having eased monetary policy at the previous meeting, it was appropriate to hold interest rates steady for the time being. Further easing of policy may be appropriate over the period ahead.”

In effect, the explanation behind not moving was that it was too soon after the previous move rather than that there had been any changed assessment of the economic landscape, Mr Evans said.

“History shows us that the language used in this paragraph is the strongest form of easing bias,” he said.

“In the 67 post-meeting statements [excluding this week’s] by the governor since the beginning of 2009, “for the time being” has only been used on eight occasions.

“In that time every governor’s post-meeting statement that has included the term “for the time being” has preceded a rate move," Mr Evans said.

“On six occasions it was the following month and on two occasions it was two months later.”

Mr Evans believes that signal puts the next move firmly either in April or in May.